Days payable outstanding (DPO): A guide to improving your cash flow

The speed at which a business can pay its invoices is crucial information for executives. Days payable outstanding, or DPO, is the financial metric specifying a business's average days to pay suppliers and vendors. This useful number helps with compliance and can give valuable insight into a company's cash flow management. Below, we explore the DPO calculation in-depth and discuss how DPO can benefit a company.

Understanding days payable outstanding (DPO)

DPO directly impacts a business's cash flow and financial management. A higher-than-average DPO means it takes a company longer than average to pay its suppliers and vendors, meaning it has free-floating cash for other needs, like investments.

However, this same company might experience relationship strain with suppliers if there is a constant payment delay. Striking a good balance requires optimizing a business’s working capital and making well-informed decisions about cash flow management.

DPO, along with days sales outstanding (DSO), inventory turnover ratio, and cash conversion cycle (CCC), paints a holistic picture of a business’s health, ultimately leading toward a healthy bottom line.

How to calculate days payable outstanding

To use the calculate days payable outstanding formula, you’ll need a few critical pieces of information:

• Accounts payable balance
• Cost of goods sold (COGS)
• The number of days in the accounting period

Here’s the formula for determining DPO:

DPO = (Average accounts payable / Cost of goods sold) x Number of days

The accounts payable balance comprises the money owed for goods or services purchased. This can include many things, such as raw materials, transportation and logistics, assembling and subcontracting works, travel expenses, equipment, leasing, licensing, and vendor payments.

Cost of goods sold is the direct expenses incurred by a business for producing a product or delivering a service. To calculate this number, take the inventory at the beginning of a period and add it to the inventory purchased during the period. Lastly, subtract the remaining inventory at the end of the period from that total.

The number of days in the accounting period can vary—most businesses use 365 to indicate a year, though you can use 90 days to indicate a quarter.

To use the DPO formula, divide the average accounts payable balance by the cost of goods sold. Then, multiply this number by the days in the accounting period.

Days payable outstanding example

Let’s assume the following information for Company A :

• Average accounts payable: $80,000
• Cost of goods sold (COGS): $350,000
• Number of days in accounting period: 365

To use the days payable outstanding formula, first calculate the following:

• Average Accounts Payable / Cost of Goods Sold
• 80,000 / 350,000 = 0.2286

Then, multiply by number of days:

• 0.2286 * 365 = 83.4

This means that, on average, Company A takes an average of 83 days to pay its suppliers and vendors.

Interpreting DPO: What’s a good ratio?

There isn’t necessarily a “perfect” DPO ratio since this number depends on factors like the company size, industry, and overall financial health. According to the American Productivity and Quality Center, the average DPO is around 40 days.

A higher-than-average DPO suggests that a business has enhanced cash flow, allowing it to use this cash on other ventures like investments.

A lower-than-average DPO suggests that a business is paying suppliers quickly. This can foster great relationships with vendors and suppliers but could also mean that the company can’t optimize cash flow and is missing out on investment opportunities.

Improving your days payable outstanding

Most businesses should aim to have an average or slightly above-average DPO. Too high of a DPO can risk your business’s reputation; too low of a DPO can mean missed opportunities. Below are some options to improve your DPO and maximize your business position.

Streamline the accounts receivable (AR) process

A streamlined accounts receivable process can help your business collect outstanding payments faster, leading to enhanced cash flow.

• Implement accounting software with automated invoice generation and delivery to reduce human error and quicken the process of receiving an invoice.
• Have an efficient payment processing plan by leveraging AR automation software to implement payment reminders and automated invoice data entry.
• Offer multiple payment options to vendors and suppliers, like credit, debit, ACH, or mobile payments, to make receiving payment fast and efficient for all.

Strengthening supplier relationships

Having solid supplier relationships is pivotal to business operations. A high DPO means that your business is taking longer to pay suppliers, but withholding payment for too long could cause vendors and suppliers to suspend or refuse service.

Remember that strong supplier relationships can lead to a higher DPO by creating more trust. To develop strong relationships with suppliers:

• Have clear and open communication regarding payment terms, invoice processing status, and any potential delays.
• Establish consistent payment practices and stick to them to avoid fees, penalties, and relationship troubles.
• Consider negotiating extended payment terms or early payment discounts to improve cash flow while maintaining a good relationship.

Leveraging technology

Letting technology take the front seat in working a business's DPO metrics is an easy way to gain the upper hand concerning cash flow.

• To efficiently manage processes, utilize custom ERP systems for integrated workflows, real-time viability, and centralized data.
• Leverage the power of AI to predict future cash flow needs and automate highly technical tasks.

The role of ERP systems in DPO management

A custom ERP systems is a tool in your business systems toolbox that can significantly impact your DPO. These integrated software systems manage many different aspects of a business, like accounting, finance, supply chain management, and procurement.

Implementing an ERP system can:

• Optimize DPO management by streamlining processes and improving visibility.
• Improve invoice processing by automatically capturing and processing invoices, eliminating the need for manual data entry and the errors that could come with it.
• Create centralized vendor management thanks to automated notifications and real-time updates with suppliers, plus portal access.
• Provide enhanced reporting and analytics with a “single source of truth” for all relevant financial data like purchase orders and invoices.
• Give businesses stronger financial control through enhanced financial reports that include DPO metrics and supplier performance analysis.

Boost productivity and enhance profitability

A business’s days payable outstanding is a true balancing act that requires careful consideration. Take the guesswork out of this process with an ERP solution from Intuit Enterprise Suite, which can automate invoices and calculate DPO on a rolling basis, letting you get back to making the important decisions to grow your business.

Days payable outstanding FAQ

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